Monday, 9 April 2018

Banking customers angry at current high interest rates

Businesses in the country have intensified
calls on commercial banks to reduce their lending rates to reflect the recent
cut in the Bank of Ghana’s policy rate.

The Monetary Policy Committee (MPC) of the Bank of Ghana, a fortnight ago,
reduced its policy rate by 200 basis points to bring the policy rate down to 18
percent, the lowest in the last 36 months.

However, the local banks are yet to reduce
their interest rates at which they lend to the businesses and households.

The businesses are keen to see that commercial banks respond accordingly by
also cutting their rates at which they lend to businesses which will in turn
cut the cost of doing business in the country and enable growth and job
creation.

The President of the Ghana National Chamber of Commerce and Industry (GNCCI),
Nana Appiagyei Dankawoso I, registering their worry at the situation said,
access to cheap credit is fundamental to the growth and development of
businesses, particularly SMEs and start-ups, which are encouraged by
low-interest rates to increase their level of investments over a certain period
of time.

“It is for this reason that the Chamber gladly welcomes the Bank of Ghana’s 200
basis points reduction in the monetary policy rate to 18% on 26th March 2018
following the investment-led recovery at the domestic and international fronts.
However, the lagged effect of the reduction in the monetary policy rate, which
reflects the cost of banking and efficiency in the banking sector, is a major
concern to the private sector.”

Ghana is noted as having the highest average banking lending rate (35.5%) in
Africa and second to Brazil (55.06%) in the world according to Trading
Economics. Businesses are compelled to access short-term credit with
high-interest rates for their long-term investment.

“We cannot continue undermining the
competitiveness of these businesses and eroding their profits with high
interest rates. It is the Chamber’s express view that the goodwill demonstrated
by the Bank of Ghana will be reciprocated by the commercial banks.”

Meanwhile, the Bank of
Ghana (BoG) has set its maiden Ghana Reference Rate at 16.82%, this means,
businesses and domestic consumers from this month are likely to have their
interest charged on facilities they access from commercial banks in the country
reduced.

This will see the cost of borrowing by businesses, especially the SME’s drop,
reducing the cost of doing business for such entities.

BoG, in a release, explained that the new Ghana Reference Rate will be the new
module for calculating interest rates and begins this April.

The GRR according to the Central Bank, was done in consultation with the with
the Ghana Association of Bankers re-constituted Working Group which reviewed
the existing Base Rate model and developed a new framework for base rate
determination.

A reference rate is an interest rate benchmark, which is used to set other interest
rates.

Introduction of the Ghana Bank’s Reference Rate
(GBRR) to replace banks setting their own base rates is expected to increase
transparency in credit lending and enhance the transmission between the Central
Bank Rate and banks’ lending rates.

It will be calculated as the weighted average of
the central bank rate and the weighted 2 month moving average of the 91-day
Treasury bill rates” and should be adjusted every six months barring any
extreme conditions in the markets.

It can be calculated depending on the type of
transaction, as some use different reference rate benchmarks, but the most
common are the LIBOR, the prime rate, and benchmark Treasury securities.

Per the statement, “the objective of the review among others is to fulfil BoG’s
commitment to move towards a more market-based model of base rate setting, in
the medium to long-term.”

Even though the central bank's policy rate is currently set at 18%, with the
GRR coming to force, a bank shall price its Flexible and Fixed term loans by adding
or subtracting its risk premium the notice said.

While Flexible or floating term loan for any tenure granted by a bank during
the implementation period will reset after each month’s publication of the GRR,
Fixed term loan rates granted by a bank in its normal course of business from
the implementation date will run until maturity.

“The ‘Base Rate’ emanating from this model is now a Reference Rate rather than
a Minimum Lending Rate for all banks as was the case with the previous model,”
the Bank of Ghana stated in the notice to the public.

In spite of this, members of
the GNCCI wants the Bank of Ghana to expedite action on the realization of the
Ghana Bank’s Reference Rate.

They
believe, the Ghana Reference Rate will help address the persistent high sticky
interest rates in the country. “The need for improved access to long-term funds
cannot be overemphasized in the wake of intense business competition”, the
GNCCI President said.